UA’s Offense is DKS’ Defense

I commented a week ago about how UA’s brand message was beginning to extend beyond its core, with forays into NASCAR and Bass Fishing over the past two weeks. Well, that clearly has not let up.

1) It’s no secret that Dick’s and Under Armour have been married for much of the past three years. Well, UA’s eyes are wandering over towards Sports Authority. The two came out publicly on ESPN this Sunday featuring Chicago Bears star Devin Hester promoting the Performance Trainers.

I think that the implications here are material. The DKS/TSA union has been sacred in retail. What’s good for one is good for the other – and vice/versa. But my rather strong view is that with UA reaching close to max productivity inside DKS stores, it has to look elsewhere for growth. In other words, Dick’s is starting to outlive its usefulness for UA (to the same intensity it had in prior years). I think we’ll continue to see this trend diverge, and the performance gap between the two widen. In the battle between content and distribution, content usually wins.

What does this mean for Nike? Check out the photo below that shows a TSA employee fixing a UA exhibit, but with a traditional Nike uniform. Nike has been massively dominant in TSA – especially vis/vis DKS/UA. Does this mean that Nike makes a bigger push into DKS? It’s possible. But all I am sure of is that frictional change with brands in this space across major accounts is rarely clean. For Nike this is a rounding error. But as someone like DKS tries to navigate through this tweak, it could be a bit choppier.

2) In an unrelated brand marketing photo-op, how can I pass on showing the photo of Devin Hester filling up his muscle car with some good ‘ol wholesome $5/gal gas? Tough to buy that kind of publicity… Nike job UA.

3) Check out Darren Rovell’s Sports Blog on CNBC. He put up an interactive poll last night asking viewers to rate new ads for Nike, UA, and Reebok. Nike wins the ‘best commercial’ vote by a factor of 2x, but interestingly only beat out UA on the ‘intent to purchase’ poll by 2/3. Still big, but not as much when you consider that Nike has 35% of the UA market and UA has about 2%.

The bottom line here is that it seems to me that Under Armour is hitting puberty from a brand evolution perspective. It is gaining the confidence to go beyond traditional brand messages, and more importantly, beyond its primary distribution partner.

I still think that margins at UA need to come down, but the branding story definitely continues to evolve nicely. I’m more concerned about Dick’s, who loses a significant traffic driver on the margin.

Will The Nasdaq Crack?

It’s earnings season and old school stock picking is winning the battles within the context of a misunderstood macro war. If you “don’t do macro” that can actually be a very good thing at this stage of the 2008 US market cycle. Provided that you are nailing these alpha moves in stocks that is – they have been huge so far. An astute investor that I once worked with said, “there’s earnings season, and then there’s everything else… get the earnings right, then we’ll worry about what to do next.”

Dylan Ratigan and his CNBC “Fast Money” crew won’t be so amped up about their “buy everything Tech” call this morning (see our “Fading Fast Money” call from May 20th). There is very little “edge” in making these rotational “sector” calls, particularly if you are a career news reporter like Ratigan is. Texas Instruments (TXN) and Apple (AAPL) lead pre market decliners this morning after issuing weaker than expected outlooks. I have critical support for the Nasdaq at 2257. If they crack it and close it below that line, look out below. If the S&P 500 breaks 1245 alongside that, I think we’ll see 30 points of expedited selling there. Trading this US market is not for the faint of heart. You have to have sharply calibrated ranges in your trading playbook, and adjust them daily.

On the macro front, what ails global stock markets is inflation. The best way to quell that is for the US Federal Reserve to raise rates and re-flate the US Dollar. Unfortunately, the US Dollar Index is weakening again this morning, trading down at 71.85. Bernanke needs to draw a line in the sand here and be sure to have the US$ hold 71.40. If the aforementioned levels in the Nasdaq and S&P 500 break and the US Dollar can’t hold, this market is going a lot lower.

Shifting to Asia, regardless if you “don’t do macro”, you’re probably in sync with us at this point that Asia has slowed. Now all of the revisionist economists, “strategists”, and historians are formally taking down their growth targets for the region, and we’re looking to identify whether consensus is too bearish. The Asian Economic Development Bank is even cutting its growth outlook this morning. They’re moving to +7.6% aggregate growth for the region in 2008. Of course they have no idea on 2009, so they changed their estimate on the out year to the same number as this. Their forecasting models are reactive, not predictive. Don’t use them.

Asian stock markets continue to have a better tone however. Partly because inflation expectations are well publicized and being addressed by Asian central banks. Partly because growth expectations have dampened alongside country indices losing half their value. India closed up +1.4% again overnight and is attempting to mount a squeeze rally of consequence, with the BSE Sensex Index closing at 14,039. Importantly, both the Shanghai Index in China and India’s market have successfully climbed above my short term momentum indicators. This is a first, and should be highlighted positively.

Europe on the other hand looks worse than any region in the world right now. There is a double edged sword to the US devaluing its currency, and that’s simply that legacy European export business get choked by a Euro priced at 1.60. The FTSE is trading down another -1.5% in London, and looks much worse than the S&P 500 does across my quantitative factors. Meanwhile the cumulative declines across the rest of Europe are significantly worse from the October 2007 highs than they are in the bellwether US Indices. Sweden, for example, is getting smoked this morning, trading down another -2.7%, and is down -32% since October. Spain and Ireland are down big this morning and have lost -32% and -42% of their respective values from the now infamous “its global this time” highs.

Great analysts can beat the market by getting the stocks right. Macro markets are smarter than most analysts however. Gold continues to trade higher this morning, up to $972/oz, reminding me that inflation is still alive and well. Just because inflation is finally consensus, does not mean that it is going away.

KM

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07/21/08 10:04 PM EDT

I’LL HAVE A SLOT MACHINE, HOLD THE WINNINGS

A combination of game mix and “tighter” slots has driven a consistent uptrend in slot hold percentage over the past 15 years. Slot hold refers to the percentage of dollars played that is kept by the casino as win or revenue. The increasing popularity of video slots and penny slots has led to a more favorable hold mix for the casinos. Casinos can also tighten slots so that customers win less often. So in other words, consumers are getting less and less paid back to them in winnings for every dollar they put in.

Hold percentage can be viewed as pricing. Slot pricing has gone up for the consumer, similar to hotel rates, F&B, entertainment, and everything else in Las Vegas as we’ve been writing about. Room rates are already falling and F&B pricing are probably not far behind. Looser slots could surely expedite the margin compression scenario discussed in our 6/22/08 posting.

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Shark Chart

NYSE Short Interest Overlaid with the XLE and the XLF

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07/21/08 10:42 AM EDT

More Evidence to Support our Thesis on MCD and Coffee

A Crain’s article reported today that MCD’s specialty beverage rollout is falling short of the company’s target of selling 350 specialty coffees per restaurant each week. The article states that according to MCD documents that sales in the Kansas City test market peaked at 359 coffees in one week in December and have since declined steadily to 217 a week in June. The sales results show that a majority of the specialty coffee sales are not bringing in new customers but rather are coming at the expense of regular coffee sales. Two other test markets in Bakersfield, CA and Raleigh-Durham, NC are showing similar trends.

I have been saying for some time now that the specialty coffee rollout would not prove to be another silver bullet for MCD’s U.S. business as I do not think MCD will be able to change consumer perception enough to steal meaningful share from Starbucks. Additionally, it will be difficult in today’s environment to convince the average MCD customer to spend $3 for a cup of coffee (as evidenced by SBUX’s recent traffic trends). This new beverage platform requires franchisee investment (costing the entire system more than $1 billion to implement nationwide) at a time when franchisees’ bottom lines are already under pressure from rising commodity costs and increased dollar menu transactions.

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07/21/08 10:34 AM EDT

Hong Kong's Hot Plate Chart

The crowd bought on the news in Asia overnight, after the well anticipated Hong Kong inflation report came in at a new ytd high of +6.1% year over year. If I am right, July’s inflation data could be lower sequentially from this June report. That would continue to inspire a short term covering rally in Asia, particularly Hong Kong.

The Hang Sang Index closed at 22,532, up +3% overnight. My short term resistance level was 22,209, so this is a positive event. The next critical level is 23,742, and I will rest comfortably, dependent on the incoming data, to make a call around that pin.

KM

chart courtesy of stockcharts.com

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